EUR/USD: Surge Above 1.20? Not So Fast, Lagarde May Lower The Euro

Bond buyers have buoyed bulls – but bears are coming from the old and continent. Wednesday’s highly-anticipated ten-year Treasury auction resulted in satisfactory demand and helped pushed yields on the global benchmark closer to 1.50% – a level that keeps investors content. The previous rise to 1.60% scared markets and boosted the greenback.

Weak US inflation figures also contributed to cooling down the dollar. The Core Consumer Price Index missed with 1.3% YoY in February, showing that at least for now, inflation remains subdued.

Will prices pick up later in the year and force the Federal Reserve to raise rates? Base-effects will likely cause a temporary increase in CPI in the spring, but investors are more focused not on 2020’s lower inflation but on 2021’s potential for overheating. The House passed the Senate’s version of the $1.9 trillion covid relief bill, moving to it President Joe Biden’s desk. Once he signs it on Friday, Uncle Sam will unleash funds that may lift not only the local but also the global economy.

For both the Fed and the White House, policy depends on people getting back to work. Thursday’s weekly jobless claims will provide some hints.

ECB decision – yields in focus

The European Central Bank has had little time to rest on the laurels of a lower exchange rate, and now, higher yields for eurozone countries are causing sleepless nights. While the Fed sees higher returns as reflecting better growth prospects in the US, the old continent continues struggling. The ECB’s new forecasts will likely be only marginally better.

If economic expansion is sluggish – in line with the EU’s snail’s pace vaccination campaign – will the bank act to lower bond yields? Officials have offered relatively stark words, but weekly bond-buying figures have been showing a surprising decline in purchases.

ECB President Christine Lagarde has the power to push returns on debt lower – either by front-loading buys, or even expanding the bank’s current “envelope” of €1.850 trillion. Will she inject new money into the ailing economies? That could boost the euro, but the slow-moving institution is unlikely to act with speed. All in all, there is room for disappointment.

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